Recently I recorded a podcast titled ‘Don’t Let Bad Credit Keep You from Getting a Business Loan’ which covers several ways of obtaining small business loans for bad credit risks.
From that interview I have assembled answers to some of the key questions small business owners ask when it comes to business financing with bad credit to better prepare you in deciding what options best fit the needs of your business.
What is considered bad credit?
When it comes to defining bad credit from a lender’s perspective there’s a combination of factors including but not limited to payment history, debt to credit limit ratios, new credit, derogatory items, inquiries and so on but one of the key risk assessment tools that lenders use to determine whether you are a bad risk or a good risk is based on your FICO score.
In today’s credit market a FICO score below 680 is considered subprime. Each of the three major credit bureaus records your credit score a little bit differently because not all lenders report to all three credit bureaus. So you want to make sure to leverage your highest score.
How do you leverage your highest score?
A good example of this was when one of my business credit members was preparing to apply for a small business loan we had suggested that he order each of his credit reports and scores from all three main bureaus before applying. His Equifax file had a 720 fico score while his other two scores were 30-40 points lower. We checked with his banker to see which bureau they pulled from and sure enough that particular bank pulled from Equifax. This allowed him to get approved for a loan based on leveraging his highest credit score.
Should I fix bad credit before looking for a loan?
Yes, if not be prepared to pay a hefty price. There is a market for every credit risk and the lenders that cater to the high risk or bad credit applicants are going to charge you a high rate of interest in order to offset the risk.
There are still several ways to obtain small business loans for bad credit without getting hammered with a high interest rate. The way to do this is by minimizing the risk to the lender.
One way is to post sufficient collateral. This type of loan is known as a secured business loan and it’s typically asset-based, which means hard assets are used like equipment, commercial real estate, receivables and in some cases inventory.
What about a Co-Signer? What potential problems can co-signers get into?
This happens to be a very common solution when looking for business financing for bad credit. A creditworthy co-signer will act as a guarantor for the business loan and they can be a business or trading partner, or investor, or subsidiary company with a strong credit score.
There are three key areas that affect a co signer:
- Personal credit check will count as an inquiry
- The debt will show up on their personal credit reports which will impact their debt to credit limit ratio as well as credit score.
- They are personally liable for repayment of the debt. So if payments are not made and the loan goes into default the co signer will be expected to pay.
Are there other ways to get a business loan without dealing with a bank?
Sure, some other ways to obtain small business loans for bad credit is through non-bank lenders. These types of lenders offer microloans that range from $5k to $25k. Some of these sites include Prosper, Lending Club, Zopa and Count-Me-In.org.
As you can see a business loan with bad personal credit is possible even during these challenging times. If you plan on applying for a loan prior to raising your credit scores or starting a credit repair plan be sure to determine what level of costs you’re willing to accept.
These options can be a temporary solution for your business to obtain the funding it needs. While some of these choices are costly you have to ultimately decide if it’s a price your willing to pay.